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Australian Banks Bailed Out
Back on the 19th September we noted how the Future Fund was advertising in the Australian Financial Review (AFR) for a Senior Analyst - Debt & Alternatives. Well, it turns out the Future Fund has been getting further involved in the credit crunch/crisis/meltdown.

According to The Australian, Australian banks have been so hard up for cash that they have arranged loans with the Future Fund.

Naturally, the Future Fund claims in the article that the loans to ANZ [ASX:ANZ], National Australia Bank [ASX:NAB] and Westpac [ASX:WBC] are nothing out of the ordinary. It claims that these loans merely form a part of its $4.2 billion fixed interest strategy.

The amount of the loan to ANZ was $500 million, or approximately 11% of the Future Fund's fixed interest portfolio. Add in the undisclosed loans to NAB and Westpac and we can safely assume the exposure is greater than 20%.

Can this be classed as a government bail-out? If it isn't it's a smart way of getting around going to the government and RBA directly. It would be interesting to find out what interest rate the banks are paying, whether the loans are asset backed, and if so, what with?

The problem with implicit or explicit government intervention is not so much the loans that are made. Although that is still troubling. It is also what the market can imply about other banks that are not provided with loans.

Consider the market reaction if Suncorp [ASX:SUN] or Bendigo Bank [ASX:BEN] approached the Future Fund and were rejected for a loan. Alternatively would the government consider that eventuality as being to unacceptable and therefore pressure the Future Fund to make loans that it considered too risky?

European Banks Given Guarantees
The UK government is now in a similar predicament following banking guarantees made by the Irish and German governments. What will it tell the market about the state of UK banks if it doesn't? There would be two assumptions. Either the remaining banks are strong enough that a guarantee isn't required, or that bank deposits are potentially at risk.

The government would probably have a tough time spinning the former argument based on the nationalization of two banks already (Northern Rock and Bradford & Bingley), and the forced takeover of HBOS by Lloyds TSB.

Interest Rates Set to be Slashed Today
On the subject of interest rates, all eyes are on the RBA in Sydney this afternoon. Will it cut interest rates by 0.50%? We don't know for certain, but the market thinks it does.

Based on the pricing of the 30 Day Interbank Cash Futures October contract there is about a 97% probability of a rate cut to 6.5%. The price of futures contract was trading at 93.42 this morning indicating how confident the market is of there being a cut.

If the RBA doesn't cut rates by the full 0.50% this afternoon we can expect two things. A further sell off on the stock market, and a rally for the Aussie dollar.

The Aussie slipped below USD$0.70 last night before making a brief recovery. It wasn't so long ago that parity with the US dollar was being talked of. For the short term anyway, all talk of that is off the table.

If the RBA does cut as expected, we shouldn't expect to see a stock market rally. Not of any substance anyway, as this should have already been priced into the market.

What is Wrong With German Real Estate?
Just a quick note following on from the issues surrounding the near collapse of the German mortgage firm Hypo Real Estate yesterday. And why this should have happened given the stagnant German property market.

Here's the chart we showed yesterday showing how German housing prices have done next to nothing during the last 30 years while prices in Australia, US and UK have shot into the stratosphere.

It would seem that the inflexibility of the German property market is in some way responsible, although not to blame. Due to the propensity of German homeowners to be less mobile, plus rent controls on private residential properties, there appears to be a much lower level of demand for housing.

Although Hypo Real Estate is primarily involved in commercial and infrastructure financing it has still come unstuck for two reasons. First is that it relies entirely on the debt markets to raise capital - secured and unsecured debt.

Secondly, in what would seem to be an attempt to increase its investment returns it held a portfolio of Collateralized Debt Obligations (CDOs) which contained an exposure to US subprime borrowers.

What does that mean for Australians? It could offer some lessons on the implications for the housing market here. We'll have more on that tomorrow.

Cheers.
Kris

Overseas Investments Could Gain Despite a Fall
By Gabriel Andre

The US Dollar Index (USDX) has been bouncing back by more than 12% since the bottom posted in mid-July. Actually this low level was the second leg of a "double-bottom" pattern which is a strong basis for a rebound. This is what happened and now the Dollar Index has retraced 61.8% of the bearish trend started in October 2006 and ended then at mid-July 2008.

This bearish trend (between points A and C on the chart) drove the Dollar Index from 87.14 to 72.5.

Click to Enlarge

The Paulson plan has been made official and it should temporally inject some fresh air on the markets. We don't know really know yet if this plan will be efficient, and we already know that it will increase the US debt above 70% of the GDP...which, on a long-term time frame, should weigh sooner or later on the Greenback's value.

However the US Dollar is not a stock therefore its value also depends on the forecasts of the other currencies. This is what made investors decide to buy back the Greenback since July. The reason is that the Euro, the other most traded currency in the world, does not convince at all. The recession seems to be unavoidable in the Euro zone. The ECB has already shown signs of future easing credit conditions to try desperately an impulse of growth in its economic area.

This weekend, a G4 summit (France, Italy, Germany, UK) stated a coordinated action plan to bail-out any potential collapses. The 4th biggest bank in Germany, Hypo Real estate, has been saved thanks to the guarantee of the German government. Dexia , Fortis and Unicredit have been on the edge, and other banks in Euroland and in UK may face big problems in the near-term.

It means the market may focus now more and more on the Euro side! In this scenario the Euro has been considered as overbought and that's why it crashed from 1.60 to 1.35 those past weeks. The Australian Dollar, with the sell-off on commodities markets, also fell from 0.9850 in July to less than 0.72 today. Rates cut in Europe, UK and Australia would tighten the interest rate differential with the US Dollar, and this also argues for a stronger US currency.

As the US Dollar index has retraced 61.8% of its previous bearish trend, this level of 81.5 may act as an intermediary resistance. Profit-taking may the driver of some pull back towards 79 or 78.

Nevertheless the most important indication in this current situation is that the oscillators are not overbought yet. The 14-day RSI and the 21-day CCI did not reach peak points or previous high levels. This means that it is likely that the US Dollar momentum is not finished yet and that a further move, first towards 84, is probable. 84 is a previous high point that may be the new target.

Good Investing,

Gabriel

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

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